Want to foster prosperity?

Focus on market-creating Innovations

CHINA has slashed extreme poverty from some 66% in 1990 to under 2% today. Clayton Christensen, a professor at Harvard Business School, an expert on innovation and one of the authors of The Prosperity Paradox, says China's prosperity comes from its market-creating innovations that have made products and services affordable and accessible. Christensen believes that other nations can replicate such success. In a conversation with Knowledge@ Wharton, Christensen discusses what he calls the three types of innovation and why only one drives strong economic growth.

An edited transcript of the conversation follows.

Knowledge@Wharton: What inspired you to write The Prosperity Paradox?

Clayton Christensen:

I was asked by the Mormon Church that I'm a member of to serve as a missionary in Korea in the early 1970s. Korea, at the time, was a desperately poor country. But over the next 30 years, Korea transformed itself from being impoverished to being very prosperous. I wanted to study that. Is there a process by which prosperity emerges, and can other nations manage this process as well? It took about 20 years for us to figure that out. The book is the result of that very long effort over many, many years.

Knowledge@Wharton: How was China able to reduce extreme poverty from more than 66% in 1990 to less than 2% today. Can other countries replicate that?

Christensen:

We think that it is replicable. That is the exciting thing about the message of the book: That it does happen to some nations and not others. There really is a process by which that happens. The key element of the argument is innovation. Innovation is probably what I'm known for in my research in business. But it turns out that there are three types of innovation. One of those three types is the key to why China became prosperous, and right next door, Russia did not, and why Korea and Taiwan became prosperous, and the Philippines did not.

The first type of innovation is efficiency innovation. This helps companies make good products cheaper. They're important in our economy because they help maximize free cash flow. But efficiency innovations don't create growth. Because you're always trying to make things more efficiently, it maximizes free cash flow but it causes you to minimize growth and job creation. In America today, much of the investment in growth is misguided because if focuses on efficiency innovations. Such innovations don't create growth; they eliminate growth.

The second type is sustaining innovation. In this, you try to make good products better. Almost all the innovations that we see around us are sustaining innovations. This type of innovation also doesn't create net growth for a corporation or for the economy. Imagine that I am working for Toyota. If I convince you to buy the Prius from me, you won't buy a Camry. If I sell you this year's product, you won't buy next year's product or last year's product. So, sustaining innovations allow us to make good products better, but they don't create any new growth.

It's the third type of innovation that creates net growth for a corporation and for a country. We call these market-creating innovations. They transform products that historically were so complicated and expensive that only the rich had access to them. A market-creating innovation transforms them into products that are affordable and accessible so that many more people can own and use them.

I’ll give you a couple of examples. America is a very prosperous nation today. But prosperity hasn’t always been the case in America. If you go back to the 1850s, America was more impoverished than Bangladesh is today. The process by which we transformed ourselves is through market-creating innovations. The Singer sewing machine is a great example of this. Prior to that, if you needed to have a new piece of clothing, our mothers had to do it by hand. It took them about a day to make a piece of clothing — trousers or pants, or shirts, and only the rich could have more than one pair of clothing. When Isaac Singer developed his foot-operated sewing machine, thousands and tens of thousands of customers — and ultimately millions of customers — could own and use the sewing machine. The company had to hire more people to make the machines, it hired more people to sell them, and then more people to distribute and service the machines and to teach people how to use them. More than two million people became owners of these sewing machines, first in America, and then around the world, because Singer made these machines affordable and accessible.

Similarly, Henry Ford made cars that, at the beginning, were available only to the wealthy. By making cars affordable and accessible, millions of people could own them. But it wasn’t that Henry Ford had to only make the car. He had to find somebody to provide the steel. He had to create a network of dealerships that could sell and service the car. For every person that Henry Ford sold a car to, he had to hire in his system eight more people to do all the things that were inherent in this marketcreating innovation. So, there is a causal mechanism. First, you make a product or service affordable and accessible, and then you set up a system to service those people who now are enabled by this affordable product or service.

You can see it happen as it unfolds. There’s another concept in the book that’s called “jobs to be done.” When you go outside in the morning, you look around the neighborhood, and you realize, “Darn it, there’s a job that I have to do today.” Some of these jobs are small, incremental jobs that occur over and over